Multiple Homeowners, and One Owner Files Bankruptcy, What Happens?

Nothing causes more disarray then having a house with multiple homeowners and one of those owners files bankruptcy. This situation commonly occurs when multiple siblings inherit a family home, or when investors buy property together. Invariably, one owner is in financial trouble and decides to file bankruptcy. When that owner files bankruptcy, what happens to the property?

Let’s set the stage. John and Jane inherit the family home after their mother dies. Jane is in dire financial straits and moves in to the home. Jane has too much debt and decides to file bankruptcy. The home is worth $200,000 and mom left a mortgage with a balance of $50,000 which Jane is paying.

Since Jane now resides in the home, she is entitled to her state’s homestead exemption. In this example, the homestead exemption is $50,000. However, the bankruptcy trustee will still sell the home. Why? The home’s net equity is $150,000 (200,000 minus $50,000 mortgage). John and Jane are equal owners. So, each is entitled to $75,000 of that net equity. Unfortunately, Jane’s homestead exemption is only $50,000. So, the bankruptcy trustee is entitled to $25,000 ($75,000 minus $50,000). The trustee will sell the house, pay off the $50,000 mortgage, pay John his $75,000 share, pay Jane her $50,000 homestead exemption, and the trustee will keep the $25,000 non-exempt equity to pay Jane’s creditors.

Taking the above example, let’s assume Jane now has a $100,000 homestead exemption. With that homestead exemption, the trustee will not sell the house because there is no non-exempt equity. The mortgage is $50,000. Jane’s interest in the home is $75,000, which is less than the $100,000 homestead exemption. Therefore, there is no non-exempt equity. John is still entitled to his $75,000. The trustee cannot realize any money from selling the property, so the property is protected.

In a bankruptcy case where the debtor’s real property has multiple owners, the first fact that must be established is the property’s value. After that, an attorney skilled in advanced bankruptcy will figure out what can happen and, if possible, come up with options to protect the home from sale.